Dines sees pessimism as reason to be optimistic

PeterBrimelow

NEW YORK (MarketWatch) -- Even dead cats bounce. So maybe The Dines Letter isn't dead yet.

First some perspective. The Dines Letter, or TDL, was my Letter of the Year in 2006. (See Jan 1, 2007 column). At that point, it was up 48% over the previous 12 months by Hulbert Financial Digest count, about three times the total return DJ-Wilshire 5000.

And TDL's record over the past several years has been equally dramatic. Over the past five years, the letter has achieved a 14.2% annualized gain, vs. 8% annualized for the total return DJ Wilshire 5000. Over the past 10 years, it's up 10.3% annualized vs. 3.7% annualized for the total return DJW.

But sometime in 2007, TDL hit the wall.

Over the past 12 months, it's down 37.9%, vs. a loss of 10.1% for the dividend-reinvested Dow Jones Wilshire 5000.

(See what I mean by perspective?)

When letters have strong longer-term records, as TDL does, I tend to check periodically in to see if they've rebounded. (See June 12 column).

TDL hasn't. Year-to-date, The Dines Letter is still down, 39.3% vs. a loss of 10.3% for the total return DJ-Wilshire 5000.

But this is far from the first time that octogenarian editor James Dines has hit a wall. And in the past, he's shown the ability to reinvent himself explosively.

Since the HFD began monitoring Dines in mid-1980, he's underperformed the market, 6.3% annualized vs. 11.8% annualized for the total-return DJW.

But that obscures Dines' periods of explosive success. He presents market monitors with what might be called the Livermore Paradox: How to you assess, ultimately, the abilities of someone who makes three fortunes and loses them -- as, notoriously, did famed speculator Jesse Livermore?

Dines seems to be brooding right now. His pace of trading has slowed sharply.

But in his most recent letter, he remains loyal to his principle play:

"While the news for uranium is as bullish as we expected, we continue to be amazed at how cheap the stocks of uranium producers are, a disparity such as we've never seen before. However, just as we indicated when oil was at its all-time high, when we declared that 'high prices cure high prices,' we can now say that low prices will cure the low prices of uranium-mining shares. This is not a market that respects value, but it will again. Our uranium portfolios are highly leveraged, both up and down, and the next bull wave could bring huge profits ... the price of uranium has been holding up well in the approximately $60 to $80 range. No person expected uranium mining shares to be trading now approximately where they were when uranium was only $10, although the whole commodity-mining group has been dragged down by the general pessimism toward nearly all stocks these days."

In fact, Dines reads this pessimism as a reason to be optimistic:

"So negative that the normal bear-market flight to quality has instead been a switch to cash due to mass fear and margin-call liquidation. The 1982 bear market was much like this, before the subsequent major bull market, after the fearful were completely sold out, so we would not be amazed by another big bull market not too far ahead."

In contrast, Dines is not at all optimistic about the world situation. He writes darkly:

"TDLrs are advised to tentatively begin their own 'Plan B' for a refuge outside a large city as we wait for political development ... we are unclear what the next president might do. We cannot imagine Israel tolerating Iran having a nuclear weapon and a delivery system, so the risk of war is in the air."

Dines doesn't cite this war risk as a reason, but he is currently bullish on gold. And in fact, his Precious Metals Portfolio is still performing relatively well, up 0.5% over the past 12 months, 29.5% annualized over the past three years, 10.3% annualized over the past 10 years. Among the stocks it ranks as buys, (in addition to a physical palladium ETF) are:

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